Monday, December 27, 2010

S'pore firms unfazed by Vietnam ratings cut

Singapore companies are thriving in Vietnam despite strains in the economy from capital flight, double-digit inflation, a huge trade deficit and a ratings agency downgrade.

In a Dec 15 report, Moody's slashed Vietnamese government bonds from Baa3 to B1, citing the heightened risk of a balance-of-payments crisis. On Dec 23, Standard & Poor's followed suit and also lowered Vietnam's long- term foreign currency sovereign credit rating to 'BB-' from 'BB'.

But listed companies like Keppel Land, CapitaLand, Asia Pacific Breweries and the three local banks seem unperturbed by Moody's alarm bells.

Vietnam's 2010 GDP growth will hit a brisk 6.5 to 7 per cent, and the pressures are showing through. Businessmen say Moody's is not flagging new concerns.

'I don't think Moody's is exaggerating the situation, but it might be late (in highlighting it),' says Wong Yit Fan, who previously headed DBS's Vietnam operations in 2007 and 2008. Now an adviser at real estate investment firm Straits Capital, he adds: 'The trends - capital flight, inflation pressure, problems with the central bank - have been embedded in Vietnam for a long time and haven't changed in a meaningful way.'

Even though sky-high inflation may reduce the purchasing power of the Vietnamese, beer producer Asia Pacific Breweries has reported growing business there. It has managed to wrap up the year with higher profitability from its Indochinese operations.

Notably, APB has installed additional capacity in Vietnam, with a bottling line in Danang having doubled production to 50,000 bottles per hour.

Dr Wong suggests that the rapidly rising income of the Vietnamese has outpaced inflation. 'The way the people have been increasing spending patterns has very strong momentum,' he says. 'My sense is that APB invested at the correct time when the momentum of consumers was moving ahead.'

One group that has done well in Vietnam are property developers, whose fortunes are tied to the peculiarities of Vietnamese investment patterns. In particular, the locals don't usually place deposits with banks. 'The only forms of wealth preservation in Vietnam have been property and gold,' says Dr Wong.

Kim Eng analyst Wilson Liew observes that although the market has been quiet of late, there is still 'strong underlying demand for housing' in Vietnam. 'I think the property developers are still positive on Vietnam for the medium to longer term,' he says. 'Fundamentals such as the growing affluence of the middle class are there. For the past three to four years, the majority of buyers were local Vietnamese, and a portion were from the Viet Kieu (the Vietnamese diaspora).'

CapitaLand's stance on Vietnam - its 'fourth pillar of growth' after China, Singapore and Australia - is unchanged. The group will grow its Vietnamese assets from $400 million currently to $2 billion over the next three to five years. Its wholly owned serviced residences arm, Ascott, also intends to increase its 1,300 apartment units in four Vietnamese cities to 1,800 by 2012.

A CapitaLand spokesperson acknowledged that rising inflation in Vietnam could push business costs higher, but said CapitaLand would manage these 'by locking in construction costs and restructuring contracts to have even more competitive pricing at different work components'.

She added that 'prices for mid-end and upper mid-end homes in Ho Chi Minh City and Hanoi remain firm'.

As recently as October, Keppel Land announced that it will undertake its fourth and fifth villa developments in Ho Chi Minh City with local property developers. It reported that its first project, the 101-unit Vila Riviera, sold out in its first year in 2006, and another, the 96-villa Riviera Cove, has seen 90 per cent of its 88 launched units snapped up.

Mr Liew says: 'Market activity hasn't picked up to that previous level, and prices are off 20 per cent from their peak. But in general, the developers are looking at a pick-up in the next 24 to 36 months.

'The pickup in volume will partly be determined by the rate at which infrastructure can catch up with urbanisation. For example, in Hanoi they intend to build a metro system and that will be positive for property developers there.'

The downgrade by Moody's is not expected to impact the three Singapore banks, which have only stepped up their presence in Vietnam not too long ago.

Each has a full branch in Vietnam but their exposure is relatively small and banks tend to take a long-term view of their investments.

United Overseas Bank pointed out that its Vietnamese operations contribute 'much less than 10 per cent of overall group profit' though it is a consistent fast-growing performer.

OCBC Bank and UOB also have 15 per cent stakes in private local banks VP Bank and Southern Commercial Bank respectively.

Says Leng Seng Choon, an analyst at DMG & Partners: 'The downgrade will have a minimal impact on them because most of their operations are in Malaysia, Singapore and Indonesia. Their investments are meant to ride on the long-term economic growth of Vietnam and I think they will provide that type of growth for the banks.'

The worst-case scenario would be their books being hit by floundering Vietnamese state-owned enterprises (SOEs). One reason for the Moody's downgrade stemmed from reduced confidence in Vietnam after state-owned shipbuilder Vinashin said it could not pay the first instalment of a US$4.4 billion loan.

However, Dr Wong says such non-performing loans should not impact OCBC, UOB or DBS. 'OCBC and UOB will not be affected that much because they do not have much exposure to this type of SOE-lending,' he says. 'We don't have to worry about DBS because they haven't fully started in Vietnam. Sometimes it's good to be late.'

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